The risk factors for the German economy are increasing. China’s recent slowdown and other emerging markets is weighing heavily on exporters. The situation in the Middle East is explosive and now the scandal around manipulated emission values is shaking up Volkswagen, the industry giant.
At the moment, indicators show the Ifo and other indices are still up, but it’s too early for the VW scandal to have had an impact on these barometers.
Germany’s blue-chip stock index, the DAX, has lost a quarter of its value since April. So is this the DAX announcing its own personal recession for 2016, as Daniel Stelter wrote in last Monday’s Handelsblatt? That is unlikely. The economy has survived most setbacks this year. The solid upswing in the euro zone economy, Germany’s most important market, has helped.
The anger that many customers feel about the manipulated emissions tests will not lead to them to buy fewer cars.
In Germany, GDP growth increased from 1.2 percent in the first quarter to 1.6 percent in the second. Economists predict 1.8 percent for the third quarter; for the fourth, they predict slightly less.
Growth is spurred by exports, investments and comparably strong spending power in Germany. In total, Germany’s economy is steering towards a growth rate of 1.5 percent in the coming year.
But what’s ahead for 2016?
Most economists expect a more rapid growth rate but many have pulled back their expectations to under 2 percent. They attribute this to the increasingly difficult economic environment.
Most of the forecasts don’t include the effects of the VW scandal. But has the VW scandal got what it takes to bring the whole economy into a global recession?
Economic debates do not suggest this is a likely scenario. The auto industry may be the biggest sector, with revenues of €368 billion and 775,000 employees, and thus a concentrated risk. But the anger that many customers feel about the manipulated emissions tests will not lead to them to buy fewer cars.
VW produced 2.6 million cars in Germany in 2014, 44 percent of car production in the country. The automotive sector, including the auto suppliers, has a 4.5 percent share of Germany’s GDP. They make up 11.3 percent of all German exports.
Let’s imagine an extreme scenario in which VW’s production decreases by twice as much as it did in the 2009 global crisis. That would be a decrease of 17 percent. Let’s imagine that this decrease would affect auto suppliers by the same amount: the revenue of the automotive sector would shrink by 7.5 percent in 2016.
But all VW’s customers are not likely to switch to foreign competitors. Let’s imagine every third customer bought their car from a different German producer. Then the automotive sector’s revenue would shrink by only 5 percent. So if the 4.5-percent share the auto sector has of GDP decreased by 5 percent, that would reduce growth by 0.225 percent.
Additionally, there would be an effect on exports: these would shrink by 0.6 percent. However, imports, too, would decrease because the fewer cars that are produced, the fewer car parts need to be imported. GDP is only affected by the difference between exports and imports, so the consequences would be minimal.
All in all, the VW scandal will not cause severe harm the economy. In order to cause lasting damage, the whole company would have to break down, customers would have to turn away from VW and another wave of scandals would be needed to seriously harm the brand “Made in Germany.” There is no sign of this.
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